Union Electric’s Neff argues against fuel clause change

Union Electric, d/b/a Ameren Missouri, is looking to avoid cost penalties due to abnormally low coal inventory levels at its power plants due to rail delivery disruptions in 2011.

The utility, a unit of Ameren Corp. (NYSE: AEE), filed with the Missouri Public Service Commission on Aug. 14 rebuttal testimony from various officials as part of a rate case. Robert Neff, employed by Ameren Missouri as Director of Coal Supply, testified on fuel adjustment clause issues.

“One purpose of my rebuttal testimony is to explain certain events that affected coal inventory levels in the test year, and to explain why adjustments should be made to the average inventory values traditionally used to set rates in prior rate cases,” Neff wrote. “Another purpose is to address why the change to the Fuel Adjustment Clause (‘FAC’) sharing mechanism from 95%/5% to 85%/15%, as proposed by [commission] Staff, would inappropriately cause the Company to absorb a significant amount of prudently-incurred delivered coal costs at a time when ultra low sulfur fuel has been purchased to comply with the Cross-State Air Pollution Rule (‘CSAPR’).”

The amount of coal in inventory in certain months utilized in staff’s calculation was considerably less than normal due to delivery issues associated with flooding along the Missouri River. These were floods that closed part of I-35 in Northwestern Missouri, and which caused devastating damage in Missouri, Iowa, Kansas and Nebraska last summer. This flooding also covered the tracks used by the railroads to deliver coal to Ameren Missouri plants.

Both railroads which haul coal to Ameren Missouri plants, the Union Pacific and BNSF, were affected by the flooding, and both declared force majeure under the provisions of the company’s rail contracts. The BNSF declared force majeure on June 6, 2011, and terminated it on Sept. 13, 2011. The UP declared force majeure on June 29, 2011, and terminated the force majeure on Sept. 26, 2011.

To maintain plant generation, coal was burned out of inventory to cover the shortfall in railroad deliveries. As a result, inventories were reduced substantially below their normal levels for several months.

Neff provided coal inventory targets for the Meramec, Rush Island, Sioux and Labadie plants, but those figures were redacted from the public version of his testimony. Ameren Missouri is recommending that the plant inventory levels be adjusted to account for the disruptions in deliveries.

Ameren Missouri takes title to coal as it is loaded into Ameren Missouri railcars at the mine. This cost is added to plant inventory cost when the trains are unloaded. Therefore Ameren Missouri is also recommending that coal-in-transit, that is, coal that has been purchased and loaded into Ameren Missouri railcars but has not yet arrived at the plant, be added to the amount in inventory at the plant to establish the inventory amount to be included in rate base. This is consistent with practice in prior rate cases.

Ameren argues against FAC percentage change

In its Revenue Requirement Cost of Service Report, commission staff recommends that Ameren Missouri’s FAC sharing mechanism be changed to 85%/15% from 95%/5%. Staff argued that the commission should “take into consideration how little incentive Ameren Missouri has with its current sharing mechanism to improve the efficiency and cost-effectiveness of its fuel and purchased power procurement activities…. Changing the sharing mechanism of Ameren Missouri’s FAC to 85%/15% will increase that incentive.”

The staff is recommending that the current sharing mechanism, which allocates 95% of the increases or decreases in net fuel costs to customers and 5% of such increases or decreases to the company, be modified to allocate 85% to customers and 15% to the company.

Neff responded that the company has done an excellent job in procuring reliable and low-cost fuel for its plants, and a change to 15% sharing would be nothing more than a penalty requiring the company to absorb a significant amount of prudently-incurred costs rather than an incentive.

For one thing, the 15% sharing would penalize Ameren Missouri for proactively complying with CSAPR. In 2011, Ameren Missouri signed a contract with Peabody Coalsales, a unit of Peabody Energy (NYSE: BTU), to purchase ultra-low sulfur coal out of the Powder River Basin. This coal will allow Ameren Missouri to delay the installation of expensive (estimated $1.5bn) scrubbers until 2018 or beyond and still meet the CSAPR requirements.

This section was heavily redacted, but Neff said the staff’s recommendation would not allow the company to pass through some of these coal contract costs to ratepayers. If the percentage is increased to 15%, three times as much of the prudently-incurred coal costs will not be recovered, Neff said. “And if the Company does not file a rate case for several years, these annual losses would multiply,” he added. Also, corresponding rail contracts were signed in conjunction with the Peabody contract and those costs are also impacted, he wrote.

The Peabody contract Neff was referring to was announced in August 2011 as part of the company’s clean-air strategy. “The backbone of the strategy is a long-term contract for the purchase of 91 million tons of ultra-low sulfur coal from Peabody Energy through 2017,” said the company at the time. “The new federal regulation, the Cross-State Air Pollution Rule, will require reductions of SO2 emissions by 73 percent and nitrogen oxide emissions by 54 percent from 2005 levels.”

The company said another key component of that strategy was the installation of $600m of SO2 scrubbers, which eliminate nearly 100% of all SO2 emissions from the Sioux plant. This equipment provided the flexibility to employ the ultra-low sulfur coal compliance strategy under the Peabody deal, the utility noted.

On Feb. 3, Ameren Missouri filed this rate increase request of about $376m with the PSC. This equates to a 14.6% electric rate increase.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.